Bill Gates: Evil Businessman or Philanthropist Extraordinaire?

Mac Diva has an ongoing dialog on this topic with one of her frequent readers, Jim, as well as some other bloggers. First, a little side note about the blogsphere: I believe techies are distinctly more libertarian than the general public and also distinctly more anti-Microsoft (this observation comes, e.g., from years of reading the comments to ZDNet stories about Gates and MS, which is usually referred to therein as “M$”). And blog-readers are disproportionately techie, giving them a libertarian and anti-MS twist. Keep that in mind if you follow this issue.

The story so far is that Jeanne d’arc of Body and Soul referred to a Salon story that had some good things to say about MS and got her inbox filled with anti-Gates emails. The whole issue came up because Gates’ father came out against repeal of the estate tax, along with Soros, Buffet, and a few other super-rich poeple. Buffet recently also came out against the current Bush tax cut.

Mac Diva’s reader, Jim, came up with a four point critique [slightly abridged]:

  • …he was well known for not giving much of anything until the Justice Department got on Microsoft’s case.
  • …he gives rather less proportionate to his wealth than others in his circumstances often do.
  • …he very often gives in such a way that it benefits his business, giving software or money towards computer instruction in school and things like that.
  • Four, and perhaps most important, is also the point I’m not positive on, as I’m not a tax expert. But as I understand it, changes in the tax code over the past decade or so, made to encourage giving, allow one to deduct the full current market value of stock given, while the income from that stock is valued at the purchase price. This bypasses capital gains. Since Gates’ Microsoft stock was originally purchased for approximately $50,000, and is now worth billions, the value of each dollar’s worth of stock is essentially nil. This, and correct me if I’m wrong, would mean that if he donates Microsoft stock worth a million, he lists as income the purchase price of that stock — this would be what, $50? Yet on the deductions side of his return, he takes a deduction of $1 million, which in a high tax bracket is worth $250,000 or more. Sounds to me like a nearly quarter of a million dollar profit for “giving” to charity.

Mac Diva does a good job on the first three points: 1) yes, he did give before DOJ’s started watching MS. It’s true that giving went up as DOJ’s cases progressed, but the first case came up in 1993, when MS was huge, but not yet a titan. So the three were simultaneous: increased federal scrutiny, increasing wealth, and increasing giving. There may be some confusion because the Bill & Melinda Gates Foundation was created in 2000, but it was an amalgamation of pre-existing charities and foundations paid for by Gates. 2) On the relative size of gifts, The Gates Foundation currently has $32 billion in assets, which puts the value of Gates’ contributions in the ballpark of 25-40% of his wealth, depending on MS’s stock price (and I recall something about his children getting $10m each when he dies, and the rest to charity; here’s one link). This is, I believe, far above the typical level of giving for the wealthy (perhaps comparable with Carnegie, Sloan, and the Annenbergs).

On point (3) the reader and Mac Diva are correct that in-kind technology gifts involve benefits to MS and by extension to Gates. But Bill Gates is very savvy and presumably factors in such benefits when deciding how much to give. That is, he might well be indifferent between giving schools $800 million in cash or $1 billion in technology. As long as the schools were going to spend at least $1 billion on technology (Word, Windows, Wintel PCs, networks,…) anyway, and don’t have a strong intrinsic preference for Macs or Linux, then the schools are better off. Now the schools have their entire budget to spend on non-tech stuff. If they took the $800m cash and spent it on $1b worth of non-MS IT then they would have $200m less to spend on all other goods.

On to point (4), the one I was asked to talk about. I’m not sure what Jim means by the phrase “the income from that stock is valued at the purchase price”. The income tax owed on long run (held over 2 years) capital gains is 20%*(sale price – purchase price). When stock is donated, the giver is allowed deduct the market price of the stock at the time of the gift from income. If a stock is never sold, capital gains taxes are not paid. Suppose Gates had $50 thousand in 1985 stock that is now worth $40 billion: if he sold it then he’d owe roughly $8b in taxes (capital gains are taxed at 20%, for now). If he gives the stock directly to a charity, then he pays no taxes. In order to avoid paying those taxes, however, he had to give $40b away to charity, which seems reasonable to me.

The one question this raises in my mind is something I’ll refer to my friends at A Taxing Blog. Capital gains are taxed at 20% while income is taxed at 36% [in Gates’ bracket]. Suppose Gates has equal amounts of income in a year from capital gains and from regular income. If he donates all his regular income to charity and then sells the stock, at the end of the day, the money he doesn’t give away is taxed at 20%. But if he donates the stock to charity and keeps the regular income then the money he keeps after charitable giving is taxed at 36%. Either way, charities get the same amount, and Gates has the same pre-tax income, but in the former case, he pays substantially less in taxes. Is this correct?

Nothing in this post is a statement about MS’s business practices (e.g., see this article); the point I am making is that, whether obtained by hook or by crook, Gates gives away a lot of money. This is true both in absolute and relative terms. And yes, there are tax benefits to Gates from these gifts, but not enough to offset the value of the gifts. Referring back to the question posed in the title, the answer is either “both” if you dislike MS, or “Businessman and Philanthropist Extraordinaire” if you like MS. Either way, the Philanthropist label seems deserved and will be even more so if at his death he gives all but $10m per child to charity.